Engineering Success: Codexis President & CEO Shares Lessons About Corporate Change Management

By Haig Armaghanian, Haig Barrett Management Consultants

Given the dynamics of today’s business climate, it might come as no surprise that change management is a topic that emerges constantly as the Haig Barrett team and I interact with executives and executive leadership teams.

After years leading the Haig Barrett team to help our clients thrive during periods of great change, I sought to learn even more. There seemed no better person to talk to than John Nicols, president and CEO of Codexis.

Allow me to put the situation into perspective. The Codexis board of directors appointed John as the president and CEO in June of 2012. At that time, the company’s engineered enzyme catalysts served three markets: biofuels, biobased chemicals, and pharmaceutical manufacturing. In fact, backed by a Royal Dutch Shell research agreement, most of the company’s R&D resources were focused on the biofuels market. Substantial R&D resources also were aimed at the biobased chemicals market, and only about 10 percent of the R&D team was dedicated to the pharmaceutical market.

However, shale oil and natural gas increasingly started to emerge as the dominant solutions to the energy independence the U.S. sought and by 2011 the biofuels market was weakening. Arguably, the Obama administration’s policies likely propped up the biofuels market for a brief period, but as the 2012 election approached, the future of the biofuels market, along with the future of Codexis, looked grim.

In September 2012, Royal Dutch Shell terminated the Codexis – Shell Research Agreement which began the process whereby Codexis laid off or sold approximately 75 percent of its global workforce. By the end of 2012, Codexis had lost more than 80 percent from its 2010 IPO market value, and by the end of 2013, nearly 89 percent of the company’s market value had evaporated.
Amazingly, Codexis’s market cap has increased more than ten-fold the since the end of 2013, and future growth continues to look quite strong. I wanted to find out just how John navigated the company through his tumultuous early years at Codexis.

Haig: When the biofuels market collapsed, and Shell pulled its funding, how did you decide in which direction you would steer the company?

John: Without funding from Shell, and with virtually no biofuels investor appetite in the market, we had no choice but to walk away from this sector. So the decision was whether to focus on the biobased chemicals market, focus on the pharmaceutical market, or split our attentions across both.

Despite some opinions to the contrary within our leadership, I concluded that the biobased chemicals route was fraught with risk. R&D costs for biobased chemical protein targets were considerably higher than those for the pharmaceutical market. At the time, we needed twenty to thirty R&D team members per biobased chemical protein target, and only about five R&D team members were needed to go after a pharmaceutical target. Additionally, the biobased chemical market was competing with a shifting world of alternative feedstocks, while the pharmaceutical industry did not have this volatility.

Ultimately, the decision to focus on the pharmaceutical market, in my view, was a no-brainer. However, the gutsy move was that we retained forty-five R&D team members but had viable business to justify only twenty-five of them. My thinking was that with this excess scientific capacity, we could innovate our way to success. This decision has paid off handsomely for Codexis, but it was a risk.

Haig: Given that Codexis literally had to turn back from near collapse, how did you restore the faith of investors, customers, future customers, and employees?

John: The employees were the most difficult and, in hindsight, the most important. I worked to instill confidence among the team that I knew what I was doing. I constantly reinforced the vision of the great technology we had and that I was confident we were going to figure out where to point this technology in the marketplace.

There was a great deal of over-communicating. Additionally, picking the right people to remain in the organization was a critical process executed with a two-step approach that allowed much better insights than if personnel selection would have been performed all at once. The first round of layoffs was immediate, and was mostly comprised of employees in middle and lower level positions. It was designed purely to accomplish financial survival objectives, being the only way we could get cash burn low enough so we could have enough time for a turnaround. However, about nine months later, the second round consisted largely of people from higher level positions. During those months I had time to figure out which people were going to fit the new strategy, the changing market, and the newly emerging culture of the company.

Once the new Codexis team was established that I had confidence in, I built a proverbial “fence” around them, and the large majority have stayed with the company ever since.

In parallel, externally, we leveraged an improving business model to obtain deals with pharmaceutical companies. Specifically, we capitalized on the success we had been experiencing with Merck to secure additional market-leading clients such as GSK. We developed new business models, including our CodeEvolver platform licensing program, to monetize our technology. Additionally, we recognized that what we were doing for pharmaceutical companies was directly applicable to other companies performing complex chemistries.

So we established an outreach to companies in other industries, which led to our finding traction in the food space with market leaders such as Tate & Lyle. The final aspect of our business development efforts that I want to touch on is that we began allowing ourselves to boldly envision new possibilities to apply our platform technology outside of our historical areas of business.

Prompted by passionate championship from one of our longstanding technology leaders, we carved out a small team of five R&D team members to place a riskier bet on drug discovery. That investment has translated into a significant growth vector for the company, capstoned today by the proud milestone of having recently entered clinical trials with our first drug candidate.

Investors were less trusting than our customers. They had been burned badly by Codexis and other companies in the space. It took a great deal of time to rebuild their trust that we did indeed have a strategy to turn the company around and that we are going to live up to our word. This industry was full of promoters that over-promised and did not deliver, so the investors lagged by at least a year, even after we started experiencing successes in the market.But ultimately when we were able to rebuild confidence with investors, many became true believers, which has resulted in investors holding on to shares for long periods, underpinning accumulation of the overall company value.

Haig: Since restoring faith in your internal team was the most difficult and the most important, let’s drill down on that topic a little bit. Tell me more about how you changed the thought processes of the internal team members and ultimately created confidence.

John: I think the biggest factor is the Codexis technology. We have a technology that people simply want to be associated with, and our leading-edge position within the protein engineering and synthetic biology industry is exciting. Our team wants to work in this space, which gave me some time to prove myself as CEO.

Also, we started winning in the market and working with great companies. For instance, we started training GSK in new R&D approaches. Imagine that! GSK is one of the most sophisticated and competent scientific organizations in the world, and we were training them how to do protein engineering! Understandably, these wins ignited the pride of the Codexis team.

Also, we were proactive with compensation plans and our approach to internal communications. As I said before, we over-communicated about what we were facing at the top of the company and in the market and the support we were requesting from the board of directors. One additional action that really helped was gaining support from the board to provide company stock to all employees following the layoffs. We designed those stock grants to be significant enough to have a meaningful effect on employee retention. All these things made the team feel as though the company was working for them, and we truly were.

Haig: I have always been fascinated by the wide range of change effective corporate leaders must manage. Which type of change management do you believe is most challenging—radical survival-driven change as Codexis experienced beginning in 2012 or more proactive subtle change?

John: Survival-driven change is not easier or harder than sustained proactive change—it is just different. I will say, though, because survival mode usually takes options off the table, it provides a freedom that can be a blessing. For instance, in my 2012 brain, I wanted to survive in biofuels, even though Shell pulled funding. It was difficult to let go of all the capability that had been built, but we didn’t have a choice. We didn’t have funding from a large corporate sponsor, and given the state of the market, we would not be able to obtain funding from investors. We had to discontinue this direction, and not having that option made the choice easier– there really was no sensible choice. However, survival mode is typically accompanied by radical cost reductions that shake employee confidence, and not having the hearts and minds of your employees in such environments is extremely difficult.

Staying true to our technology has been our key to and strategy for sustained growth. Our technology continues to differentiate the company, so we remain exclusively focused on exploiting our core technology. With amazing technology in hand, the question then becomes where to go in the market. The market is moving dynamically, but staying true to the technology focuses 60 percent of the organization. The responsibility for how to commercialize and monetize the technology then falls on 20 percent of the company. Within this dynamic space, we explore and try new things, being quick to assess what is working and what is not working and to adjust rapidly and constantly to the changing needs of our customer base and the market.

I will say that having an ongoing R&D team working on “future bets” rather than current work has helped us a great deal to constantly pull the company forward.

Haig: What change management advice do you have for other executives?

John: Focus on your talent—listen to their worries, fears, and hopes and speak to those emotions. Also, be as decisive and bold as possible. Make changes in big steps rather than in baby steps because you need to get the company on new footing as quickly as possible. If you are constantly taking small, incremental steps, you never find your new footing. So I can’t recommend highly enough that you move as quickly as possible to find your new base to build from.

Over-communicating with your team is also key. The team will be unsettled and a bit scared, you silence will only increase anxiety. So share as much and as often as you can.

 

About John Nicols
John prides himself as a builder of growing international businesses and organizations, successfully deploying both organic and M&A strategies in doing so. As President & CEO since June 2012, John has lead the turnaround and growth of Codexis Inc, the Nasdaq-listed protein engineering company based in Silicon Valley, California. Prior to Codexis, John worked in various business leadership roles for more than 22 years at Albemarle Corporation, a maker of highly engineered specialty chemicals. Spanning three successive multi-year chapters there, John lead the growth of the company’s largest, billion dollar plus global catalyst business, turned around a struggling half billion dollar fine chemicals business, and expanded and globalized Albemarle’s flame retardants business. A native of New York city, John and his family have lived widely across the USA, and also enjoyed an exciting three year assignment in Tokyo, Japan in the late 1990’s. John received a bachelor’s degree in chemical engineering from the Polytechnic Institute of New York University (now NYU) and an MBA from the Massachusetts Institute of Technology. Outside of work, John proudly boasts about his 30 year marriage, two fabulous children, and four delightful grandchildren. John also has passionately applied himself to help solve the plight of the millions of patients suffering from myalgic encephalomyelitis / chronic fatigue syndrome, and is the Board Chair for the leading patient lead organization for the cause in the US, the Solve ME/CFS Initiative (www.solvecfs.org).

About Haig Armaghanian
On any given day, you’ll find Haig working with longtime clients, collaborating with other Haig Barrett team members on their projects, penning a book he’s working on and squeezing in a yoga class. How is Haig able to do so much? One word. Passion. And five more very important words: He loves what he does. After 12 years in leading management roles at Rio Tinto, Haig wanted to create a different kind of management consulting firm—one where the consultants are hands on, in the weeds and standing alongside their clients. Born and raised in the UK, Haig earned a Bachelor of Science (Honours Degree) in Chemical Engineering from the University of Surrey.